A Strategic Analysis of TESCO - Essay Example

Strategic perspectives: A strategic analysis of TESCO BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY Tesco, the largest supermarket retailer in the United Kingdom, maintains dominant market share in the country over that of main competitors such as Morrison’s, Sainsbury, and Asda. Tesco maintains significant cost leadership as a competitive advantage as the result of having substantial purchasing power. Coupled with is differentiation strategies as part of business level strategy, Tesco maintains the highest level of revenues over that of any other supermarket chain in the UK. Research has identified that threat of new market entrants and competitive rivalry are the most influential in what drives Tesco’s strategic developments. Additionally, the volatile economic conditions in the UK serve as major concerns for achieving consumer loyalties, which are part of the company’s mission. Based on all research findings, it has been recommended that the company utilise more promotion in public relations to expand perceptions of competent and viable corporate social responsibility focus. Additionally, based on consumer behaviour patterns and the economic conditions in the UK, it is further recommended that the company begin launching more private label brands that are aligned with discounted pricing structures. These recommendations will better align the corporate level strategy with the publicised mission of Tesco and sustain higher levels of competitive advantage for the firm. TABLE OF CONTENTS 1.0 Introduction.......................................................................................................... 2.0 Analysis of the external environment................................................................. 2.1 Micro-level analysis.................................................................................. 2.2 Macro-level analysis................................................................................. 3.0 Analysis of the internal environment.................................................................. 3.1 The resource-based perspective............................................................... 3.2 The value chain.......................................................................................... 4.0 Public relations evaluation.................................................................................... 5.0 Strategic analysis.................................................................................................... 5.1 Business level strategy................................................................................ 5.2 Corporate level strategies........................................................................... 5.3 Recommendations for strategy improvement........................................... 6.0 Conclusion................................................................................................................ 7.0 References................................................................................................................ Strategic perspectives: A strategic analysis of TESCO 1.0 Introduction Tesco is a UK-based, multinational supermarket and general merchandise retailing organisation. This retailer giant is currently the second largest retailer, in terms of profitability, just behind Wal-Mart with revenues of £64.83 billion in 2013 (Tesco 2013). Tesco maintains presence in 12 different countries throughout North America, Europe and Asia. Sustaining a market share of approximately 30 percent in the UK, it is considered the largest supermarket in comparison to its main competitors: Morrison’s, Sainsbury, Waitrose and Asda. This report conducts a strategic analysis of Tesco, inclusive of the external environment impacting operations and strategy with an emphasis on the UK market, the internal environment, an evaluation of its reputation from a public relations perspective, the firm’s existing strategies and a series of strategic recommendations are provided to improve its market and competitive positions. 2.0 Analysis of the external environment This section describes the relevancy and impact of external market forces, utilising Porter’s Five Forces Model for analysis, as well as the PESTEL framework. Tesco operates in many highly saturated competitive markets in an industry with dynamic forces that strongly impact operational strategy for the firm. 2.1 Micro-level analysis The Five Forces model, as described by Thompson, Gamble and Strickland (2005), provides five important market forces in the external market that have potential impact on competitive market positioning for the business and operations strategy. These are inclusive of competitive rivalry, buyer power, supplier power, threat of substitutes and the risk of new market entrants. Of the most significant concern for Tesco is the threat of new market entrants. In the UK, there is a growing consumer trend for grocery products sustaining lower prices as a result of decreasing consumer disposable incomes still stemming from the 2008-2011 recession. This had led to strengthening revenues for new market entrants offering private label brands at discounted prices. One such entrant is the supermarket chain, Iceland, an emerging competitor that appeals strongly to price-conscious consumers and an everyday low pricing model. In 2011, Iceland engaged in an aggressive growth strategy, acquiring 51 different Woolworth’s stores (a company in administration) and opened a plethora of stores in the UK, boasting nearly 800 new stores in the UK (The Guardian 2011). Tesco, itself, witnessed a 100 percent growth rate in consumer acceptance of private label grocery products occurring between 1982 and 2004 (Coriolis Research 2004). New market entrants sustaining a business model with discounted pricing structures and the distribution of private label brands serve a significant competitive threat especially in an environment where consumer behaviour is beginning to trend toward acclaim for private label products. The extent of competitive rivalry in this highly saturated UK supermarket environment is also of substantial concern to Tesco. In a competitive environment where supermarkets are having difficulty differentiating from rather standardised food procurement models, main competitors such as Sainsbury’s are beginning to diversify. For instance, Sainsbury’s recently launched its own private-label clothing line known as Tu, representative of affordable clothing targeted at younger consumer segments. Tu is currently distributed only in-store at Sainsbury’s in an effort to promote more impulsive purchases and bring consumers into the store. This strategy has provided Sainsbury’s with £680 million in additional revenues as a result (Reid 2013). Through aggressive integrated marketing communications, the brand reputation of Sainsbury’s continues to improve in a mass market context, creating a new type of loyalty to companies such as Sainsbury’s. Concurrently, there is also a growing trend in the UK known as ethical consumption, which is defined as the desire to patronise businesses that have very high ethical standards whilst boycotting companies with less emphasis on corporate social responsibility. A recent study indicated that one-third of surveyed consumers would even pay high prices for products if they perceived the organisation to maintain a positive ethical position (Grande 2007). It is even recognised that companies with high ethical values achieve higher profitability (Lys, Naughton and Wang 2013). Sainsbury’s has begun capitalising on this trend, developing a corporate governance system that is inclusive of many different steering committees such as the climate change committee, the great place to work committee (focused on HR ethics) and a community steering group (Sainsbury’s 2011). This large competitor in the UK actively publicises the efforts and outcomes of ethically-motivated steering groups which provides a positive brand reputation for disparate consumer segments attracted to businesses that provide social value. This new type of competitive rivalry with focus on ethical consumption trends provides consumer loyalty toward competition which improves competitive revenue growth. The aforementioned are the only significant factors that strongly impact Tesco’s competitive position in the UK, as competitors are equally impacted by buyer power in the market, supplier power, and threat of substitutes. The globalised supplier network provides both hindrances and advantages to Tesco and competition in terms of negotiating pricing structures on products procured in relative equilibrium. Buyer power is only noticeable in the low switching costs that consumers have with the volume of competitors in the UK. 2.2 Macro-level analysis Not all factors associated with the PESTEL analysis are relevant to Tesco. For instance, the political environment in the UK is supportive of free market economy businesses in equal proportion for Tesco and its main competitors. The only substantially relevant factors for Tesco are economic factors and social factors. From an economic perspective, all grocery companies in the UK are being impacted by lack of disposable income in many different consumer segments. Due to recent austerity packages imposed by the government, consumers are witnessing substantial food inflation costs. For example, food and drink costs increased by 2.8 percent in 2012 and by a margin of 1.8 percent in the year 2013 which is representative of a massive 5.6 percent increase in just a single year (Hawkes 2013; Allen 2012). In order to remain competitive, all main supermarket chains must be considerate of pricing on its food products, sustaining competitive pricing structures to ensure that consumers do not defect to competitors. With rising costs of food and beverage along the entire local and global supply chain as a result of many European austerity packages, competitors in this industry could potentially face losses if they utilise recurrent pricing promotions and do not increase prices as a result of consistent and large-scale food inflation costs. From a social perspective, competitive grocers in this industry are revamping their existing loyalty programmes (common among all major competitors) to provide exclusive discounts and other pricing-related promotions to consumers. The literature on the subject indicates that when consumers have membership in such programs, it establishes a sense of belonging with the firm and a perceived sense of ownership in the company (Hart, Smith, Sparks and Tzokas 1999). Additionally, consumers judge the relevancy of a corporate brand and pricing fairness when discounts are given to select consumers, but not to others (Darke and Dahl 2003). Many competitors are using tiered loyalty programs that provide superior rewards to consumers with high status (high expenditures) as a contemporary method of capitalising on the socio-psychological factors in many consumer segments. Constant revamping in companies like Morrison’s and Sainsbury’s as it pertains to restructuring the loyalty program to include new and exclusive benefits could potentially erode market share with Tesco when strong loyalties are established for competitors. Consumers become loyal to these programs and not the corporate brand identity when their favourite loyalty programs are able to provide perceptions of superior value (Yi and Jeon 2003). Hence, the socio-psychological aspects of consumer behaviour in the UK are of significant concern for Tesco and the company’s main competition. Coupled with rising costs of food, consumers are more price-sensitive and are seeking value in their grocery consumption. Competitors that are able to appeal to consumers, through marketing prowess, that they have superior loyalty program benefits can erode market share from Tesco and improve loyalty levels that are imperative in a highly saturated industry in the UK when consumer switching costs are quite low. 3.0 Analysis of the internal environment Also of considerable concern to Tesco is the internal environment. The resource-based view of companies describes how Tesco might sustain competitive advantage, a model that states such advantages lie in the ability of the firm to properly bundle tangible and intangible resources available for the firm, transforming these resources into advantages that are not easily replicated by competition (Peteraf 1993). Another suitable model is the value chain model, the notion that an organisation, as a holistic system, should be constructed with subsystems that work inter-dependently to provide more valuable outputs for the business. Figure 1 illustrates the value chain model. Figure 1: The Value Chain Model 3.1 The resource-based perspective Tesco is an innovator in providing consumers with convenient online shopping capabilities, which are not largely imitable by competitors without the same substantial revenue stream and financial capital position of Tesco. Tesco realised that there was growth in online shopping trends for home delivery of grocery and general merchandise and became the first competitor to offer a well-developed home delivery system through online ordering. This shopping system, known as Tesco Direct, is highly innovative in comparison to competitor online shopping sites. For instance, the firm provides consumers with a virtual shopping cart that allows them to store their favourite products. Known as API, it is an electronic development database that allows consumers to ship by barcode number, text, department, special offers and even product favourites recurrently purchased. This has paved the way for the future, which will allow smart appliances to interface the website and order stock when it is depleted, such as in refrigerators with smart technology (Graham 2009). Other companies offering online shopping in this industry do not have the same resources for information technology development which gives Tesco a significant competitive advantage. The company even recruited local UK developers to join the company in 2009 during an event labelled open innovation day which invited experts in IT to help the company improve its Tesco Direct website (DuVander 2009). This knowledge, capability and expertise in web shopping development provides consumers with a unique type of convenience and user-friendly attributes that could, theoretically, build more loyalty for Tesco. In fact, in 2007, the company reported a 29.2 percent increase in online sales with revenues of £1.2 billion (Tesco 2007). This enhanced revenue stream improves year-on-year. Tesco also maintains competitive advantages in terms of price. Tesco maintains significant purchasing power along the supply chain leading to cost reductions in key areas of procurement. This purchasing power manifests itself by having specific name brand organisations and manufacturers of products funding a variety of in-store promotions. They can even force suppliers, through this purchasing power, to delivery products according to terms established by Tesco specifically; similar to the Wal-Mart model of procurement. This is not an attribute replicable by the company’s main competitors. Competitive advantage is also illustrated by maintaining a cost leadership position, which is also representative of the company’s powerful purchasing power in the industry. Tesco purchases products in bulk quantities, which provides for quantity discounts and also the establishment of competitive bidding related to procurement contracts. Switching costs for suppliers who gain significant revenue growth by catering to the demand of Tesco are very high and suppliers want to maintain this potent relationship with Tesco. As a result, suppliers comply more substantially to Tesco’s demands and provide lucrative contracts that control procurement costs for the firm. No other competitor in this industry has this same level of dominance along the global supply chain. 3.2 The Value Chain The main component of Tesco’s value chain that provides the firm with competitive advantages is the emphasis on training in the human resources function. Tesco operates under a highly decentralised business model where decision-making occurs horizontally with considerable consultation with employees. This not only builds commitment with employees and loyalty to the firm, but motivates employees to achieve the corporate goal of service excellence. Tesco HR is well-developed and focuses on training and coaching employees to achieve their maximum potential and skills development with ample career advancement opportunities. Tesco has constructed a comprehensive Personal Development Plan model by which performance is regularly measured and feedback provided to better equip employees to be self-actualised and performance-motivated (The Times 100 2009). Tesco has even developed company-supported, tangible learning universities to improve the managerial competency of employees, requiring significant capital expenditures for asset procurement which are not achievable by competitors as a result of their financial positions. Additionally important to Tesco’s market position is the role of marketing and sales strategies. Tesco has used Wal-Mart’s everyday low pricing model as a benchmark, establishing the Tesco Everyday Value ideology. Tesco provides products using simplistic packaging which reduces the retail cost of products significantly for consumers. Rather than being reliant on recurring price promotions, a common strategy with competitors, Tesco illustrates a positive value proposition using pricing as a marketing tool. Tesco even caters to the premium consumer segment under the Tesco Finest marketing strategy, offering products with superior ingredients and gaining recommendations from top cooking experts in the United Kingdom. This philosophy showing product superiority has even extended into general merchandise, with Tesco’s Fine Home lines that encompasses top quality merchandise in-store and online. Tesco’s vast logistics network for procurement allows for differentiation of the company with premium and value-added product purchasing that equates to an extended perception of value with important target consumers. 4.0 Public relations evaluation In the United Kingdom, there are competition laws established the prevent monopolisation of a single company in an established market, designed to protect consumer interests. However, in 2007, the firm was criticised for maintaining ownership of a large amount of undeveloped land in the UK as a means of preventing market entry or expansion of competitors (BBC News 2007). Tesco currently maintains the largest land development portfolio of any UK grocery retailer (BBC News). Wal-Mart, a retailer with considerable financial capital, has also come under criticism and investigation for alleged anti-monopoly activities. This is a corporate governance issue, as the Board of Directors for Tesco make determinations about alternative investment strategies which are inclusive of real estate procurements. Companies in the UK are regulated by the government, however the most primary emphasis in UK legislation related to corporate codes of conduct are to ensure shareholder interests, which would, theoretically, be satisfied by having significant asset availability related to real estate. Milton Friedman, a respected business theorist, suggested that the only tangible obligation of a business is to seek profit and ensure its own financial interests (Fleischacker 2011). In a similar viewpoint of Adam Smith, this ensures that a business provides better social output such as jobs creation. However, it was previously identified by Grande (2007) that consumers are now demanding more ethical behaviour from companies in order to gain their business patronage. However, should the company be considerate of social accusations from a PR perspective or simply fulfil the obligations of improving shareholder wealth? According to one theorist, “effective boards build capabilities that allow them to protect assets and manage threats to future growth” (Deloitte 2009, p.1). This is what Tesco appeared to be doing whilst also complying with UK governance regulations. However, from a social perspective, the company was not considering the needs of consumers and was even allegedly creating a hostile environment which could serve to drive out the potential for smaller grocers to attain growth and competitive market share. Additionally, Tesco came under fire for allowing several of its alleged “all beef” products to maintain sizeable portions of horse meat (Glotz 2013). This is of substantial concern for reputation management as “shoppers want more information about what’s happening to their food” (Grocer 2010, p.5). From a social perspective, it would appear that Tesco was not diligent in protecting the interests of shareholders, allowing suppliers to fail to meet compliance expectations as a means of cost reduction along the supply chain. As a result, recent polls have shown that 64 percent of consumers were going to change their meat-buying behaviours (Chahal 2014). Lack of control over supply chain compliance measures illustrates a lapse in focus on corporate social responsibility, especially with acknowledgement that consumers are choosing to provide consumption expenditures with organisations illustrating legitimate and high ethical focus. Tesco, as the only competitive target involved in what is now called horsegate, maintained significant brand reputation problems that could impact consumer willingness to remain loyal to Tesco as a responsible provider of international products. 5.0 Strategic analysis This section describes Tesco’s strategic developments and evaluates their potential effectiveness in comparison to main competition in the industry. 5.1 Business level strategy Tesco maintains a hybrid business strategy that is inclusive of cost leadership and differentiation. Cost leadership, as identified, includes the overwhelming purchasing power that the firm maintains in the UK and the international marketplaces. Differentiation is observable through the many different product line extensions that have been established by the company as a means of creating consumer perceptions of uniqueness. Tesco has diversified by establishing its own banking unit, implemented through acquisition strategy of the bank Northern Rock. Tesco Bank, the new entity, now offers 6.5 million consumers with credit cards, insurance and loans (Brownsell 2013). Tesco has established a considerable amount of brand loyalty in many different consumer segments for its cost leadership and ability to maintain lower pricing models on many products, which has given more incentive to select Tesco Bank as a trustworthy and consumer-centric organisation. Banking industries require significant managerial competency, capital investment, and risk management as a means of securing consumer transactions and ensuring revenue growth. By diversifying, the company provides substantial shareholder value and further increases consumer brand loyalty. This gives Tesco considerable competitive advantage by retaining loyal customers and establishing a brand identity that is diverse and capable of better servicing the needs of stakeholders in many different segments and socio-economic backgrounds. 5.2 Corporate level strategies A successful corporate level strategy is to align business activity and structure with the specific mission statement of the firm. The company’s mission is to create enhanced value for consumers which builds lifetime loyalty. Hence, the company’s establishment of a well-developed and tiered loyalty program, building service competency through HR-related training imperatives, providing an extensive line of products, setting competitive and low pricing structures, and emphasising corporate social responsibility align the business properly to satisfy diverse stakeholders. The company continuously reinforces the value of its products with emphasis on pricing to satisfy the needs of price-conscious consumers. Value is also presented to consumers with a marketing strategy that places ample investment into store design and facilities layout as well as providing service competency in-store. In every respect, the company is competently aligned with its mission of enhancing perceptions of value to its important constituents. Product development, therefore, is the most substantial competitive advantage related to its corporate level strategy. This is witnessed in the following product developments recent for the firm: Healthy Living – products procured that have low sugar, fat or salt content than in standard competitive brands. Organic Living – products without pesticides to provide consumers with healthier eating alternatives. Tesco Kids – a range of product brands targeted at children such as a line with branding partnerships with the Walt Disney Company. Fresh and Easy – ready-made meals for busy consumers. Tesco selected a differentiation strategy (coupled with cost leadership) in a saturated market where market orientation did not provide many opportunities for future growth, a main premise of this strategy (Porter 1987). The company followed the better-off test model of diversification by recognising new business units (i.e. the banking unit) would give it competitive advantages. 5.3 Recommendations for strategy improvement Due to the recent brand reputation problems from a PR perspective associated with a lapse of proper corporate social responsibility, Tesco should be focusing more on publicising its efforts to improve stakeholder interests rather than focusing largely on shareholder wealth security. Tesco does not utilise the plethora of PR tools available, ranging from press releases to social media, indicating the steps the company is taking to service the needs of consumers. Sainsbury’s has created a much better brand image as a result of publicising the efforts of its consumer-centric steering committees in terms of CSR which could erode trust in the Tesco brand. It is therefore recommended that Tesco establish a corporate governance structure that implements steering committees related to multiple aspects of corporate social responsibility. Such implementation techniques could include consumer safety committees (in light of the horsegate scandal) and then use in-store brochures and pamphlets indicating the efforts and outcomes of governance cooperation with such steering committees. In a highly saturated competitive environment, where companies such as Sainsbury’s are gaining more patronage and positive brand sentiment for CSR, Tesco can ill-afford to avoid using public relations strategies and structuring the board with more consumer focus. It is further recommended that Tesco begin revamping its supply chain partnerships with local UK manufacturers to provide consumers with more private label brands at discounted prices. The emerging competitor, Iceland, which specialises in discount, generic brand products is finding substantial growth and loyalty with price sensitive consumers. It was illustrated that economic conditions in the United Kingdom are eroding consumer incomes and causing significant food-related inflation. Even though Tesco maintains an everyday low pricing model, the company should use more price promotions on brand name products and discounted private label products to gain more attention from price-conscious buyers. According to Dawes (2004) pricing promotions are one of the most primary aspects by which consumers judge quality of a business. The economic conditions of the UK, coupled with rising inflation, and consumers seeking more value create an opportunity for Tesco to be a leader in private label product offerings that would erode effectiveness of competitive presence for Iceland and another discount supermarket, Aldi. It would also represent an opportunity for Tesco to illustrate how it supports local growers and agriculturalists, therefore further enhancing consumer sentiment and perception about Tesco’s strong focus on corporate social responsibility. 6.0 Conclusion As shown by the research, Tesco maintains considerable competitive advantages over that of its main competition. In general, the industry is favourable for Tesco sustaining these advantages which are representative of its cost leadership advantages, high capital availability and revenue growth, and ability to successfully diversify the business model to cater to many consumer segments with differing socio-economic backgrounds. However, in order to align operations and strategic intention with the mission, there needs to be more emphasis on publicising CSR efforts and providing consumers more price-related value perceptions. In a market saturated with supermarket competitors, where growth is difficult to achieve, Tesco requires only a revamped supply chain for private label product development and more successful marketing and public relations strategies to gain important consumer loyalty with disparate consumer market segments. 7.0 References Allen, K. (2012). UK food inflation pushes higher, The Guardian. [online] Available at: http://www.theguardian.com/business/2012/apr/04/uk-food-inflation-higher-brc-neilsen (accessed 1 April 2014). BBC News. (2007). UK grocers face competition probe. [online] Available at: http://news.bbc.co.uk/2/hi/business/6287923.stm (accessed 1 April 2014). Brownsell, A. (2013). Tesco delays banking launch until 2013, Brand Republic. 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